First, do no harm

The current stimulus plan working through Congress is a terrible plan! It is full of pork spending and little incentive for growth. The best solution for solving the current crisis includes an end to mark-to-market accounting, a program of incentives to business and investors which keeps marginal tax rates low (preferrably flat as well), and continued support of the credit system by the Fed and the Treasury (as should be their role in a crisis). These are all issues we have discussed previously at length but the looming threat of passage makes restatement critical, in our view.

Our post entitled "The consumption / production distinction with regard to stimulus plans," in which we explained why we disagree with the stimulus bills in general, demonstrates that the current stimulus bill does not have solid intellectual arguments in its favor nor does it have any previous historical examples of success from similar legislation.

In fact, there are plenty of examples from history which show that such misguided stimulus can be quite harmful.

Recently, Professor John H. Cochrane of the University of Chicago's Booth School of Business published an article entitled "Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies?" in which he details the many possible deleterious side effects possible from the stimulus package now being debated.

Noting that medical analogies are often used in order to argue that "we have to do something," Professor Cochrane asserts that if we are going to use medical analogies, then the medical rule we should observe right now is "First, do no harm" and proposes that 90% of good economic policy is encompassed in that simple dictum.

He goes on to note that the kind of stimulus proposed by John Maynard Keynes has long fallen into disfavor in economic thought, and that even the neo-Keynesians now reject the solutions that Keynes proposed prior to the insights of Friedrich Hayek and Milton Friedman.

Professor Cochrane says that "Fiscal stimulus advocates are hanging onto a last little timber from a sunken boat of ideas, ideas that everyone" including the Keynesians themselves have abandoned.

We explain the role of mark-to-market accounting in greater detail in previous posts, including "Taking stock of 2008" and "It's not worth zero, but if the market says it is . . ."

Removing the mark-to-market requirement (or allowing it to be used in parallel with other valuation methods based on cash-flows or the value of the collateral, as suggested by Alex J. Pollack), providing tax rate cuts, and allowing the actions that the Fed and Treasury have already taken to do their work, will resolve the problem without the potentially disastrous consequences of the stimulus now being proposed by Congress.

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For later posts on the same topic, see also:


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